I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

How Can the Sci Fi Billionaires' Planetary Resources Make a Profit From Mining Asteroids?

We’ve now had the announcement of the business plans of Planetary Resources. Enough to excite everyone who read Heinlein or Jerry Pournelle as a teenager. But the big problem is how might they actually turn a proft? To which the answer is manipulation of the futures markets.

The Planetary Resources website is here. Various news reports are here, here and here.

an asteroid 7 metres in diameter and weighing 500 tonnes could contain as much gold, platinum and rare earth metals – such as rhodium

As ever when matters get technical the newspapers don’t get it. Rhodium is a platinum group metal, not a rare earth.

There’s a very good description of what they’re really trying to do here. But it’s the point raised here which I want to address: how can they make a profit?

You can, to a certain (not very high) level of accuracy, divide asteroids into three types by composition. The two that are of interest are the water bearing ones which Planetary Resources intends to mine to produce water in space then the metallic ones. These are nickel iron and it’s thought that they will be high in platinum group metals (platinum, palladium, osmium, iridium and rhodium). Three of these are used in large volumes here on Earth and have high prices: in the $50 million to $150 million a tonne level.

Bringing down 100 tonnes or so of each of these, if they really can be found and mined up there, would defray quite a lot of costs if not actually make a profit. Leave aside though whether it is technically feasible, which it probably is at some level of cost, and consider the economic feasibility. For sadly it fails at this point.

These metals have such high values because of their rarity against the value we can extract from their use. Having a huge increase in supply doesn’t change the value we can extract from their use: but a huge increase in supply will definitely change their rarity and thus collapse their price. Which means that mining asteroids for them only works in economic terms if you either don’t mine very much of them or you don’t bring them back to Earth. Neither of which will make you much money to defray the enormous costs.

Which leaves the company in something of a bind. If they cannot create the technology to mine these metals in large quantities then they cannot make any profit. But if they do create the technology to mine them in large quantities then they also cannot make any profit because large supplies won’t be worth very much.

However, there is a way out of this for the company. Use and manipulate (entirely legally of course) the futures markets. I wouldn’t say this is an entirely serious suggestion but it is indeed possible.

So, imagine that they have reached one of the nickel iron asteroids, it is high in the platinum group metals, they can mine it and they can deliver those pgms to Earth. The moment everyone knows that there is some hundreds of tonnes of these metals on the way down the price will collapse. The answer? Sell the metals in advance, through the futures markets. Get today’s price for delivery in the future.

In fact, sell many more futures than the amount of metal which is to be delivered: go short. As an example, say platinum is $2,000 an ounce (not far off the real price, $62 million a tonne). Planetary Resources is going to deliver 100 tonnes. But instead of selling $6 billion’s worth of platinum for delivery in three months, sell 10 times as much: $60 billion’s worth*. When that 100 tonnes splashes down, in fact when the market knows that the 100 tonnes is likely to splash down, then the market price will fall. Substantially but for illustration we’ll say to $200 an ounce.

The company then delivers that 100 tonnes for which it is paid the $6 billion agreed on those futures deliveries. It still owes the market another 900 tonnes but it can now cover its short at $200 an ounce having sold the futures at $2,000 an ounce. Use the $6 billion that’s going to be incoming to do so and what do we have at the end?

The company has $60 billion incoming from having sold futures. It has delivered 100 tonnes at $6 billion and covered the short for that $6 billion. Net profit $54 billion minus the cost of the space program. Which is pretty good really.

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You are of course missing an important fact…Having done the development,and being the only source of rare earths with total price control…they will be able to undersell any earth based consortium…they will set the prices.There is so much untapped resource potential…they can control any market by raising or lowering production…Plus…it’s entirely possible to refine(pun intended)their processes to such a degree that the recovery costs become minimal…If you take an ore bearing rock and set it spinning in the focus of a concave mirror,the various metals will separate themselves… Techniques which cannot be duplicated on earth…With zero gravity,near perfect vacumn,free solar power…the advantage is incredible.

An argument I have seen made is that vastly increased availability of lower-cost platinum group metals will lead to a great increase in the industrial market for them that will counter-balance the drop in value.

If iridium (or whatever) cost a fraction of what it cost now, what would engineers build with it?

Fuel-cells for one would quickly transition from a scientific novelty to revolutionary staple technology if not for the extreme cost of Platinum and Platinum group metals needed for high efficiency catalysts. What would be the market value of enabling an economically viable technology that could replace the petroleum industry?

The reason why there is very limited use of platinum and palladium as well as other metals like gold is because of how rare they are. These metals have unique properties and with huge quantities available new technology can be created resulting in a much bigger market just like aluminum which transitioned from being more valuable than gold to being in every kitchen. And the cost of mining will go down over the course of the next two decades until it is not more of an issue than the cost of mining in an incredibly deep hole

What makes you think they are going to take the entire mass of the first asteroid and drop the whole thing at once into the market?

We’re talking decades here. Their first proof of concept isn’t going to strip mine the whole asteroid and over night double the amount of platinum ever mined on earth. So the prices will drop, yes. But not instantly, and not to nearly 0. It will still be rare for quite some time.